July 7 (Bloomberg) -- U.S. stocks rose, erasing their losses following a terrorist attack in London on optimism the bombings will have little impact on the economy and profits.

``The market has an ability to support surprises because of the underlying resilience of earnings and the outlook to earnings,'' said Mario Gabelli, chief executive of Gabelli Asset Management Inc., which manages $28 billion in Rye, New York. ``Right now there is a margin of safety in the market.''

Retailers including Gap Inc. and Nordstrom Inc. led the recovery as the industry reported the best sales growth in more than a year. Alcoa Inc., the first member of the Dow Jones Industrial Average to report second-quarter earnings, rallied after the close as results exceeded expectations.

The Standard & Poor's 500 Index added 2.93 to 1197.87 after slumping as much as 1 percent. The Dow Jones Industrial Average gained 31.61 to 10,302.29. The Nasdaq Composite Index rose 7.01 to 2075.66. Each benchmark gained 0.3 percent.

Shares of travel and leisure-related companies such as Walt Disney Co. failed to recover with the market on concern terror fears would keep people at home.

Seven stocks increased for every six that decreased on the New York Stock Exchange. Some 1.52 billion shares changed hands on the Big Board, 1.5 percent more than the three-month daily average.

Terror Attack

A group purporting to be the terrorist organization al- Qaeda claimed responsibility for the attacks, a statement posted on the Islamist al-Saha Web site said. At least four explosions occurred after 8:50 a.m. local time at London subway stations and on a bus, killing at least 37 people and injured 700 others.

The attacks come on the first day of the Group of Eight summit, which U.K. Prime Minister Tony Blair was attending, and a day after London was awarded the 2012 Olympics.

The U.S. raised the terror threat level for public transit systems nationwide. The Nasdaq Stock Market Inc. said it will observe a moment of silence tomorrow at 11:00 a.m. in New York for the victims.

European stocks posted their steepest losses since August as the Dow Jones Stoxx 600 Index lost 1.8 percent to 274.69.

The S&P 500 dropped 1.5 percent on March 11, 2004, the day synchronized bombs killed more than 190 people in Madrid, and recovered most of that loss the next day. The benchmark jumped 5.9 percent in the week after the Bali, Indonesia bombing in October 2002.

``The markets have reacted the way they often do under periods of great stress, initially dropping and then recovering,'' said Edward Keon, chief investment strategist at Prudential Equity Group LLC in New York. ``I still think stocks are a very good buy.''

Alcoa

Alcoa rose 9 cents to $26.09. After the market's close, the company said profit excluding some items was 46 cents a share. Analysts surveyed by Thomson Financial expected 45 cents, on average. The stock added 91 cents to $27 in extended trading.

A gauge of retailers added 0.6 percent after the industry reported higher June sales growth as warmer weather spurred purchases of air conditioners and summer clothing. Sales at stores open at least a year jumped 5.3 percent, the International Council of Shopping Centers said.

Gap, the largest U.S. clothing chain, added 76 cents to $20.99 after the company reaffirmed its annual profit forecast of $1.44 to $1.48 a share. Analysts expected $1.39 according to in a Thomson Financial survey.

Nordstrom rallied 71 cents to $35.56 after the upscale department-store chain posted an 8.1 percent sales gain in June for stores open at least a year.

Disney Falls

Disney, an operator of theme parks and the No. 2 U.S. media company, slid 34 cents, or 1.4 percent, to $24.45 for the second-steepest loss in the Dow average. Delta Air Lines Inc., the No. 2 U.S. carrier, slumped 10 cents to $3.38.

To contact the reporter on this story: Dune Lawrence in New York at dlawrence6@bloomberg.net.

Last Updated: July 7, 2005 16:16 EDT